5 Strategies to Protect Income From Taxes
Reading Time: 4 minutes The old adage goes, ‘Save money, and money will save you’.
Whether you work for a salary or are self-employed, if you make six or seven figures per month, saving money on taxes won’t be easy for you in most parts of the world. But there are plenty of ways to lessen your tax burden. Below are five strategies to reduce your overall taxable income.
Table of Contents
1. Start a Business
Having a side hustle not only brings in extra cash but also has tax advantages. The UAE Corporate Tax (CT) law, for example, offers tax exemptions to small businesses. A tax resident can opt out of declaring taxable income if their revenue stays below AED 3 million annually. However, there are certain sections of the CT law that will no longer be applicable to you if you apply for small business relief. In this regard, speaking to an experienced financial advisor to navigate the tax regulations may be a good idea. Oblique Consult comes to mind when it comes to reliable, personalized guidance on UAE CT law.
2. Max Out Your 401(k)
If you’re a U.S. resident, you likely already know about this. But for those who don’t, many U.S. employers offer a 401(k) as a type of retirement savings plan. It allows employees to save and invest a portion of their salary before taxes are deducted.You can grow these contributions tax-deferred until you withdraw them during retirement. Some employers offer matching contributions to encourage employees to save for retirement.
Maxing out a 401(k) refers to contributing the maximum allowable amount to your 401(k) retirement savings account within a given year. The Internal Revenue Service (IRS) typically sets the annual contribution limit for this. By “maxing out,” individuals aim to take full advantage of the tax benefits and potential employer-matching contributions offered by their 401(k) plan.
Easily Craft Stunning WordPress Websites that Excel in Speed and Design!
Divi AI Empowers You to Effortlessly Create Content and Produce Images Right within The WordPress Builder.
Comparable retirement plans such as Canada’s Registered Retired Savings Plan (RRSP), Australia’s Superannuation, Germany’s Riester-Rente, and the UK’s Individual Savings Account (ISA), though named differently, share the common goal of helping individuals prepare financially for retirement.
3. Engage in Tax-Aware Investing
In the United States, the investment income earned on assets held within a 401(k) or individual retirement account (IRA) typically remains untaxed until withdrawn. Hence, it’s advisable to place income-generating assets, such as bonds or non-qualified dividend-producing stocks, in tax-deferred retirement accounts. Upon retirement, however, withdrawals may be subject to ordinary income tax rates or potentially tax-free, especially in the case of a Roth account.
Other one-off distributions, like actively managed equity funds and convertibles, should also be kept in a tax-sheltered account. If you’re looking for a more tax-efficient investment option,the UAE’s Federal Treasury Bonds are your best bet. These bonds are typically considered low-risk investments as they are backed by the government’s creditworthiness. The federal government generally does not tax the interest income from treasury bonds because the UAE does not tax personal income.
4. Harvest Losses to Offset Capital Gains
A tax loss happens when a business spends more money or gets fewer deductions than it earns in a certain tax year. Most countries allow for the subtraction of this loss from future taxable income, referred to as a carry-forward tax loss. In contrast, in the UAE, businesses can’t subtract tax losses from previous years’ profits. Tax loss relief, according to Article 37 of the tax law, lets businesses reduce their taxable income in later tax periods, but they can only offset up to 75% of their taxable income.
Also, there are conditions for transferring tax losses to another business, such as both businesses being legal entities and residents with similar ownership structures. However, if either business is tax-exempt or has its shares listed on a stock exchange, this transfer does not apply. Keep in mind that tax laws are subject to updates. Therefore, it’s advisable to consult with a competent tax advisory service like Oblique Consult, which has a thorough understanding of the most recent UAE tax laws.
5. Prepare for Tax Season Early
If you want to maximize your take-home income and reduce your tax obligations at the same time, tax planning is a good first step. For the uninitiated, tax planning involves evaluating your financial situation and making sure all the elements in your balance statement align well to help you pay the least taxes possible.
To ensure a smooth tax season, start by gathering essential financial documents such as income statements, expense receipts, investment records, and business documents if you’re self-employed. Stay updated on the latest tax laws and regulations regarding eligible deductions and tax credits for both individuals and businesses.
Additionally, consider using software like QuickBooks and Xero for payroll and bookkeeping tasks, as well as Karbon and Canopy for workflow automation and secure document storage.
Some of the link on this post may have affiliate links attached. Read the FTC Disclaimer.
